Stocks soar to new records on hopes for continued stimulus

The stock market streaked to new highs Thursday as investors remained hopeful that the Federal Reserve’s easy money policies will continue to drive the U.S. economy.

The Dow Jones industrial average and the Standard & Poor’s 500 index, the two most widely followed market barometers, jumped a day after Fed chief Ben S. Bernanke gave the clearest sign yet that the central bank will maintain its stimulus programs.

Investors were spooked when Bernanke hinted last month that the Fed may end a bond buying program widely credited with spurring the long-sluggish economic recovery. That triggered a sell-off that temporarily slowed this year’s bull market.

But buyers were back in action Thursday, convinced the market has more room to run.

“The Federal Reserve is the great enabler,” said Patrick J. O’Hare, chief market analyst at Briefing.com. “Mr. Bernanke gave it another hit of positive euphoria with a clearer message that the Fed’s in it for the long haul and investors need not fear a rise in rates at the Fed’s hand.”

The Dow is up 18% this year after vaulting 169 points Thursday to 15,460.92. It was the blue-chip index’s 24th new high this year. The S&P 500 has risen 17.5% to 1,675.02. Small stocks, which are extremely sensitive to the outlook for the U.S. economy, have climbed 22%.

It’s the best performance for the Dow and S&P since 2009, when stocks began to rebound from the global financial crisis. With moderate gains in the year’s second half, both market yardsticks could achieve their best showing in a decade.

The market fell nearly 5% from late May to late June after Bernanke said the Fed may start to relax its stimulus program later this year in light of the increased sturdiness of the economy. The central bank has been spending $85 billion a month to buy Treasury and mortgage bonds to hold down interest rates to spur sales of homes, cars and other big-ticket items.

In a speech Wednesday, Bernanke maintained that the Fed still could start to wind down the bond-buying this year. But he made clear that it won’t abandon its accommodative policies anytime soon.

That’s been encouraging for investors such as Jesse Fayne, an intern at the William Morris Endeavor talent agency. He’s feeling optimistic and is in a buying mood.

“The past few weeks have been excellent to me,” the 22-year-old Culver City man said. “I’m going to put more into high-risk stocks, because that portion of my portfolio has been doing overall better. You just have to keep notching away at it.”

U.S. stocks this year have been boosted in part by the relative misfortune of other investments.

Bonds have fallen sharply in the last two months as interest rates surged. That saddled risk-averse investors with unexpected losses, increasing their willingness to branch into stocks.

And emerging-market stocks, which had long captivated investors with visions of middle-class consumers popping up across the globe, have been hit hard.

Investors have been stung by slowing economic growth in China, combined with economic and political turbulence in countries such as Brazil. Despite a 5% gain Thursday, emerging-market stocks are down 13% this year, a huge gap compared with the U.S. markets.

Even gold, a favorite of investors worried the Fed’s monetary policy would stoke inflation, is down more than 28% from its peak last October.

“We’re back to new highs [in stocks] now, and we’re seeing people move back into the stock market because, frankly, it’s the only source of return in town,” said John Bollinger, head of Bollinger Capital Management in Manhattan Beach.

Still, many small investors remain wary of stocks and continue to watch from the sidelines.

Many individuals have yet to overcome the psychic trauma lingering from the bruising bear market that took hold during the financial crisis. Despite the gains in recent years, they worry that share prices could easily sink into a deep decline.

That’s been exacerbated by the travails of Apple Inc., a favorite stock among mom-and-pop investors. They’ve been rattled as shares of the Cupertino, Calif., company plunged this year amid fears its pipeline of hit products is slowing. Shares have slumped 39% from their peak last September.

Looking forward, the economy must prove that it can withstand a rise in interest rates that have raised borrowing costs on homes, cars and credit cards.

The yield on the 10-year Treasury, a bellwether that affects home-mortgage and other rates, has risen nearly a full percentage point in the last two months, to a current 2.57%. That’s still low by historical standards but has pushed up mortgage rates.

Fixed mortgage rates rose this week, with lenders offering 30-year home loans to solid borrowers at an average of 4.51%, according to housing lender Freddie Mac. The average rate, up from 4.29% last week and 3.56% a year ago, is more than a percentage point above last fall’s record low of 3.31%.

The jump in rates has not changed the outlook for the housing market dramatically, but it is beginning to weed out some buyers, said Doug Shepherd, owner of Shepherd Realty Group in Riverside.

For instance, he said, anything priced below $300,000 is still selling quickly, but homes above that price are taking longer to sell.

“Any bump in interest rates will certainly make buyers less qualified, and as prices rise and interest rates rise, they qualify for less,” Shepherd said. “We still have high demand and low inventory, and prices are rising, but it is certainly knocking people out of the marketplace or they are paying more monthly.”

As for stocks, the rally is exciting active investors such as David Reynaga, 23, a day trader in Woodland Hills.

“The market’s in a rally and will pick up again,” he said. “We’re going to be seeing new highs through the end of the year. It should be good — all green from here.”

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Times staff writer Alejandro Lazo contributed to this report.